China and Inflation: A Higher Currency Stems Inflation

The NYT reported that inflation in China is higher than its leadership's targets. It might have been worth noting that a higher valued currency helps to lower inflation.

This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.

A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.

For some reason China is apparently not considered this obvious path for addressing its problems with inflation.

“For some reason China is apparently not considered this obvious path for addressing its problems with inflation.” Possibly they think they can control inflation by raising interest rates, which is what they are currently doing, but that just sucks in hot money: not much of a solution.